The United States government yesterday issued a warning to all American banks and financial institutions about doing business in the Cayman Islands.

This is the first impact after Cayman was placed on the Organisation for Economic Cooperation and Development's (OECD) money laundering blacklist last month.

Bermuda was kept off the list after signing up to OECD regulations. It had been feared that Bermuda would be included in the damaging list, but after lengthy negotiations, Bermuda was left off the list of tax havens against whom sanctions will be taken.

In a move which is likely to have serious repercussions on the economy of the Caymans, the Department of the Treasury, Financial Crimes Enforcement Network has issued a warning to about money laundering practices in Cayman.

The report states: "This advisory is being issued to inform banks and other financial institutions operating in the United States of serious deficiencies in the counter-money laundering systems in the Cayman Islands.

"The impact of such deficiency of the scrutiny that should be given to certain transactions or banking relationships involving the Cayman Islands, in light of the suspicion transaction reporting obligations of financial institutions is discussed below.'' The document goes on in detail to list `serious and systematic problems' where: Financial Institutions are not required to identify their customers.

Financial Institutions are not required to maintain records of customers' financial transactions or account opening documents.

Cayman Island law makes it impossible for the supervisory and regulatory authority to obtain information held by financial institutions regarding their client's identity without a court order. Officials have no access to information relating to investment funds held by 15 or fewer people.

Failure to report suspicions transactions in these institutions is not subject to a penalty. If an institution is accused of money laundering it can invoke a `reporting defence'.

Cayman law bars its supervisory and regulatory authority from collecting for and sharing with its counterparts records of financial transactions and customer identification.

The four page document goes on to list Cayman policies which make null and void international counter-money laundering rules.

It says: "The Cayman Islands remains committed to strict bank secrecy, outside of a limited suspicious transaction reporting and international cooperation regime. The over 7,000 exempted companies registered in the Cayman Islands may issue bearer shares.'' The document states that these deficiencies have caused Cayman Islands to be identified as "non-cooperative in the fight against money laundering''.

In Caymans defence the document says the island has criminalised money laundering and cooperates with the United States law authorities.

But it adds: "Nonetheless, the legal, supervisory and regulatory systems of the Cayman Islands at present increase the possibility that transactions involving the Cayman Islands will be used for illegal purposes.'' The warning includes transactions originating in or routed through the Cayman Islands, or involving entities organised or domiciled, or people with accounts in the Cayman Islands.

BUSINESS BUC